World’s Largest Pension Funds Ignoring Climate Breakdown – How Can They Fix It?

As long-term and diversified investors, pension funds are exposed to a variety of financially material climate-related risks and opportunities. In addition to physical risks such as extreme weather events and long-term climate system changes, pension funds also face transition risks associated with a rapid shift to a low-carbon economy. As these risks continue to escalate, so too do the expected economic costs, which have been projected to potentially reach $360 billion a year by the next decade in the United States alone.

This report assesses and ranks the responses of the world’s 100 largest public pension funds to climate change, and its implications for savers. The data collected for this survey is arguably the most comprehensive source currently available and covers a range of dynamics and topics relevant for pension funds from a climate perspective. Furthermore, the underlying methodology is also thematically structured around the Taskforce on Climate-related Financial (TCFD) Disclosures recommendations, thereby also offering an ‘industry barometer’ on how the TCFD framework is being implemented.

Figure 1: Top ten ranked pension funds

The most striking finding of our analysis reveals that over 60% of pension funds publish little or no information on their climate responses, placing them at risk of breaching their legal duties to their beneficiaries. While a quarter of funds acknowledge their climate responses are aligned with their fiduciary duties, 11% have published statements clarifying this important connection. Our assessment of formal climate policies finds that only 10% of funds, however, have a formal investment policy that seeks alignment with the goals of the Paris Agreement.

Our regional analysis finds the EMEA region (Europe, Middle-East, and Africa) to outperform Asia-Pacific and the Americas, driven largely by leadership from Netherlands and Sweden and despite average performance from the UK. Strong results from California and New York reveal a pocket of leadership within the United States, despite overall weak performance at the national level. Australia also demonstrates leadership in the Asia-Pacific region, outperforming neighbouring countries.

Our assessment identifies a large gap in the formal climate-risk assessment of portfolios, with nearly 90% of assets collectively managed by the funds (representing US$10 trillion) yet to undergo assessment. In the minority of cases where this has been undertaken, we find that transition risks (especially stranded assets risk) are more widely assessed than physical risks. However, Only 15% of pension funds have developed a policy on phasing out exposure to coal-dependent assets. A greater proportion of funds, almost 20%, are performing forward-looking climate scenario analysis in their portfolios, as recommended by the TCFD. Carbon footprinting remains the most widely used climate-metric, undertaken by roughly a third of funds, though generally performed across equity portfolios only.

Regarding climate governance, we find over 60% of finds lack basic board oversight or senior executive accountability for climate-related issues while 70% of funds are yet to identify climate change as a material level at the board level. Further analysis finds only a minority of funds undertake climate-related training for key decision-makers, which is generally ad-hoc and does not include boards and senior executives. Communicating with beneficiaries on climate issues is also identified as a weak spot, with less than a fifth currently undertaking this.

Our research also identifies room for improvement in the area of managing key stakeholder relationships around climate issues. Over 60% of pension funds are yet to factor climate change into their asset manager relationships at the selection and monitoring stages. Around half of the pension funds assessed engage with their investee companies on climate issues, though these engagements largely focus on improving disclosure instead of action, and often lack an escalation strategy such as filing or voting on climate resolutions or embedding time-bound objectives.

On the topic of low-carbon investment, we find that on average only 1% of portfolios are currently being allocated to low-carbon solutions. When calculated for AAA-A rated funds, this figure increases to 6%, signalling that it is realistic to increase green investments. Only 24% of funds, however, disclose and quantify their low-carbon investments, with our analysis revealing a fragmented and inconsistent approach to measuring and reporting.

This report also contains a number of supporting recommendations for regulators, members, and pension funds that aim to help lift the overall performance of the global pensions sector on managing climate-related risk.

We call on regulators to clarify legal duties with respect to integrating climate issues into investment decision-making, install mandatory reporting requirements in line with the TCFD recommendations, and support the development of a harmonized taxonomy for low-carbon investments.

We call on members and beneficiaries to hold their funds to account on how they both manage and communicate on climate issues.

We call on the pension funds and their trustees to take immediate steps toward not only improving their climate-related disclosures, but to take meaningful steps toward decarbonising their portfolios and escalating their investments in low-carbon solutions.